I'm referring specifically to bond markets, which in turn are having an influence on the stock market. This post isn't being made to question inflation or if the the Fed is overreacting, that is a debatable topic. The point is we have been given the Fed's roadmap for the next year essentially……continue incremental rate increases for the next couple months, whether they're 0.25bps or 0.5bps is up for debate, but the ultimate goal is around 5%.
However, as I type this bonds are yielding (and continuing to drop):
- 3 month: 4.66%
- 6 month: 4.83%
- 1 year: 4.65%
- 2 year: 4.09%
So what does this mean? This means, markets believe A) The Fed will never hit 5%, and B) Sometime between 3-6 months after terminal rate is reached, there will be a pivot (not a pause) and the Fed will drop rates. This is where I'm having a problem. Okay, I can get the sentiment that maybe people are believing that the Fed will pause rates before hitting 5%, sure, but it would make absolutely no sense that they would immediately begin reversing course on their rate increases before the end of the year. Even if we hit 4.8% as the terminal rate, it would make sense that the Fed pauses there and holds for a prolonged period, not immediately drop the rate back another 0.25bps three or so months afterward and continuing to drop it in the months following, unless something broke in the economy.
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